State budget stakes are huge as tax filing deadline nears

State officials always watch closely as income tax receipts pour into Connecticut’s coffers at the April 15 deadline.

But with a lingering deficit this year, huge social service cuts and tax hikes already proposed for next year — and a costly transportation initiative likely to require major funding — the stakes rarely have been higher.

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Revenue Services Commissioner Kevin Sullivan

In years past, state income tax receipts would ride into the final weeks of the legislative session like the fiscal cavalry, providing hundreds of millions of anticipated dollars, rescuing imperiled programs, averting tax hikes — and even fueling some tax cuts.

With nearly 40 percent of income tax receipts tied to individuals’ investment earnings, which can skyrocket in a strong economy, Connecticut has benefited greatly from its proximity to Wall Street.

And while skyrocketing income tax growth hasn’t happened since before The Great Recession of 2008-10, officials from both parties remember those earlier times with fondness. They just are cautious not to guarantee their return as tax receipts pour in this week and next.

“It is way too early to say anything intelligent about April” income tax receipts, Department of Revenue Services Commissioner Kevin B. Sullivan said Friday.

Gov. Dannel P. Malloy’s revenue chief added, though, that “March was a strong month, with total state tax collections running $138 million ahead of the same month last year and $87 million ahead year-to-date.”

State Comptroller Kevin P. Lembo noted in his last budget forecast that income tax receipts from paycheck withholding during the first eight months of this fiscal year were up 1.6 percent over the prior year. But he immediately noted that “withholding receipts have yet to attain pre-recession growth rates.”

Unfortunately for Connecticut, some good news may not be enough good news given all that is at stake.

The current budget may be as much as $191 million in deficit with less than three months left in the fiscal year, most of the budget spent and thus little available for cuts. Connecticut needs to collect close to $2 billion in income tax receipts this month just to stop the red ink from getting worse.

Rep. Cathy Abercrombie

A similar problem exists for the 2015-16 fiscal year, where nonpartisan analysts project a much bigger deficit, just over $1.3 billion. A healthy April this year could improve income tax projections for 2015-16 as well. But the current deficit already assumes income tax growth next fiscal year of almost $500 million. This means Connecticut needs growth-on-top-of-that-growth for the deficit to improve.

Malloy’s solution to the deficit next year includes: hundreds of millions of dollars in cuts to social services; a net tax increase of about $180 million with business and hospital levy increases offset partially by a sales tax cut and a new income tax credit for retired teachers; and cancelation of more than $215 million in tax cuts signed last term and scheduled to begin in 2015-16.

The governor’s fellow Democrats, who control the legislature’s Appropriations Committee, are expected later this month to recommend restoring some of those social service cuts.

For example, an estimated 34,200 parents of minor children and pregnant women would no longer be eligible for Medicaid under the governor’s proposal. Parents who lose coverage would instead be eligible to buy insurance plans through the state’s health insurance exchange. Unlike Medicaid, which is free, the plans would require people to pay premiums, co-payments and, in some cases, deductibles.

Another cut would reduce payments to health care providers who treat poor patients by a total of $225 million over two years. Affected are hospitals, clinics, dentists, vision care, transportation, non-emergency medical transportation, laboratory and X-ray services and durable medical equipment.

Rep. Cathy Abercrombie, D-Meriden, who serves on appropriations, said last week she wouldn’t rule out supporting an income tax increase to salvage those social service programs most crucial to the poor and disabled.

Abercrombie added that, as co-chair of the Human Services Committee, “I see the faces of those cuts” more often that some officials do. “Those cuts are devastating.”

Rep. Christopher Davis

Malloy, who campaigned on a pledge not to increase taxes, has pressed lawmakers to stay close to his spending bottom line.

But the governor has his own need for revenue.

Malloy wants to launch a major transportation initiative that will require an estimated $400 million in new annual revenue about four years from now.

But the governor wants this venture approved well before then. A study panel is expected to recommend later this summer how to pay for this initiative, and many lawmakers speculate it will involve tolls, tax hikes or both.

Will legislators have the stomach to approve a hefty tax increase this spring to close next year’s deficit and preserve social services, and then do it again, possibly this fall, for transportation?

Surging income tax receipts that matched some pre-recession growth years, could make many of those tough choices unnecessary.

Similarly, a bad April could turn very tough choices into a fiscal nightmare.

Rep. Christopher Davis of Ellington, the ranking House Republican on the tax-writing Finance, Revenue and Bonding Committee, said Connecticut officials need to focus more on what they can control: namely curbing spending.

“I certainly do hope that we receive some good news” with April income tax receipts, Davis said. “There is some indication that our economy is getting slightly better. Unfortunately I do worry that we also could be facing even tougher numbers.”

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Economist Don Klepper-Smith

Don Klepper-Smith, chief economist with DataCore Partners in New Haven, expressed similar concerns.

According to the U.S. Bureau of Economic Analysis, personal income in Connecticut rose 3.7 percent in the 2014 calendar year. And earnings from October through December were up 1 percent from the prior quarter.

Dividends, interest and capital gains were up 3.5 percent in 2014 in Connecticut, and jumped one-half of 1 percent in the final quarter.

Those growth numbers are modes —hardly exciting — said Klepper-Smith, who was chief economic adviser under Gov. M. Jodi Rell.

“We continue to move in a positive direction,” he said, “albeit slowly. But we still have a long way to go in terms of adding new jobs and creating an environmental conducive to business growth.”

“We’re not going to go gangbusters,” he added, “and there is nothing to indicate we are entering a robust economic situation any time soon.”

Keith, with Jacqueline Rabe Thomas, won first prize in investigative reporting from the Education Writers Association in 2012 for a series of stories on the Board of Regents for Higher Education. The former State Capitol bureau chief for The Journal Inquirer of Manchester, Keith has spent most of 24 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut's transportation and social services networks. A former contributing writer to The New York Times, Keith is a graduate of and a former journalism instructor at the University of Connecticut. E-mail him at kphaneuf@ctmirror.org.

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